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Interesting, Joe & Josephine Consumer gets flogged if S/he consumes and gets flogged if they save. Just a few months ago all the experts were complaining that Joe & Josphine were not saving enough. Now, the experts are complaining that the two are saving too much. Perhaps we need to reorganize our economic thinking and the economy so that the macroeconomy is not so dependant on the irrational whims and actions of mindless consumer units.

Although I do agree, that a good percentage of the consumption behaivor that occured was based on refinancing of mortgages to take advantage of the "equity" that had built up due to the inflation of home prices and stock prices. Where's that "equity" now and the Bankers that instigated the "run" on that equity?


Interesting. Posner says that certain "considerations persuade me that the run-up in housing prices probably did increase consumption significantly."

This is news?


Neil..... you've got it again! Our Prof make the case that the Fed policy was unsound but it's a complex world today isn't it?

First, it's only been the last couple of decades that it's been easy for home owners to do equity-out re-fi's. In that earlier time the only reason to re-fi would have been if interest rates dropped enough to cover the transaction costs.

Well, those changes were timely too, as in the 90's stock returns were the "second income", after the crash, home equity became the ATM. Of course one effect of pumping equity out of our homes is to create a tremendous demand for more mortgage capital.

Going back to a generation ago, if the Fed eased "too much" typically it would court inflation or inflation fears; thus mortgage rates would increase in keeping with higher yields on 10 year bonds.

Today....... and specifically in the early 2000's surely one pressure on the fed was to tighten in order to shore up a weak dollar and attract foreign capital that might otherwise be reluctant to take the loss in currency valuation.

I did quite a bit of wondering why those with A Pile bought our low yield bonds in light of a falling dollar and guessed that the doubling in world capital in recent decades meant there was far more "hot money" looking for a safe harbor than any nation or combination of nations could absorb.

But I missed it! I was thinking of foreign biggies buying bonds much we would; getting a measly 5% if we're lucky. And the answer is that they didn't.

Instead they were buying derivatives or otherwise funneling money to those on WS who were leveraging it at 30-1 making 6% mortgages a very attractive proposition.

So Goldman, AIG and others have been "our Fed" for the last eight years and it is their shenanigans that "created" even more "capital" that overheated home prices rather than the fed. With the frothy peak being the NINJA "loans" of giving mortgages to any passing stranger.

Ha! 30 loans on hyper-inflated home valuations to absolute flakes hoping only to flip the house in a year on only enough cash to cover one! These guys HAD to KNOW they too were running a Ponzi concealed only by its complexity.


The conversation keeps coming back to "what are the toxic assets worth" but few or no one seems to take a crack at it. My guess is the mortgage backed stuff is UGLY.

Take a look at this chart:


Home prices left the norm about 2000 and it would seem they'll revert to the norm, or if the economy is poor they'll have downward momentum and overshoot the support line to even lower prices. The average stay in a home used to be about 7 years. With all that's gone on I suspect the average life of a mortgage is perhaps 5 years or less. So a lot more than half of the loans being "underwritten" (Ha!) since 2000 are ranging from being far underwater to no equity.

If, as I suspect, the older loans are tucked away in Fannymae the "toxic assets" of the fast crowd are likely to be VERY ugly indeed!

What do you think?


Professor Posner,

I agree with you. The creation of irresistible short term incentives tipped many consumer's consumption choices towards the short term. We cannot place blame on any one party, administration or piece of legislation. It was the confluence of the "housing experiment" combined with poor responses to the last asset bubble that created an environment that biased short term consumption over longer term consumption.

Rational choice theory is all we need to explain the crisis and the agent's decision to incur debt.


RPB, "rational choice"? A truly rational individual thinks over the long term, not just the short.

Jack, Yep! My cousin's wife was in the Mortgage Business just prior to advent of the "New-Improved Mortgage Business". Her response, "This is Insane"! and she got out of it. Kind of explains it all. As for the valuation of the Assets, it all comes down to the price they'll bring at Market. But, the Bankers are afraid that the value that they have assigned them on their books are multiple factors above their true Market Value, and so, in order to keep their Banks viable, not too mention their jobs, they have no interest whatsoever in finding out their true value.


Neil, yes, I too have been close to the housing and mtg biz. If the "assets" were not chopped and diced "instruments" it would seem their best shot would be that of holding them and dealing at the retail level of making the best of it. Though given what seems to me a HUGE amount of underwater or break-even situations combined with soaring unemployment along with the need/desire to move to where job opps might be better the default rate is bound to be high. (An understatement!)

As we've seen, trouble is the consumer is beyond the reach of the "asset" holder and vice versus as anyone trying to DO a work-out quickly learns. Sooooo, do they hang on to a portfolio where they've little control over what takes place? Let the chips fall? Hard?

Then look at the equation for the prospective buyer of the mess; he too has no control, at least until Congress? or someone delegates work-out power and remuneration to loan servicers..... ie that the servicer will have binding power to do workouts. BIG flaw here though as the servicer is not spending his own money. Instead there will be a bias toward slapping together a "workout" getting the predictably fixed fee per workout and moving on.

So, with the BEST of intent appraising the worth of the "assets" seems an impossible task, and as we've repeatedly seen, best-of-intent is a scarce resouce.

Me? I'm guessing this bump up in the Dow is based on superficial talk of things being "fixed" and a desire to be overly optimistic. One, or more, shoes to drop?


Jack, We're in uncharted waters here and the compass and sextant are broken. Not too mention someone threw the Charts overboard. Dead Reckoning and Gut instinct, tells me more are yet to drop.


Neil, ha! being a long time mariner..... you picked the right metaphor.

Posner sez:

"The personal savings rate has since risen to more than 4 percent. The fall in house and stock prices, combined with increased unemployment and fear of unemployment, convinced many people that they didn't have enough precautionary (safe) savings, and so their current savings are heavily weighted toward cash and other riskless, or very low-risk, forms of savings. The reallocation of income from consumption expenditures to very safe forms of savings reduces current consumption without increasing productive investment significantly, and so contributes to the depression.

..............Oh? Surely much of the conservative savings are going into FDIC backed bank accounts where each $100,000 backs over a million bucks of lending capability. So current consumption is reduced by one unit while lending in enhanced by 12 units?



Do not confuse prudence with rationality. Many people engage in behaviors that defies their long term benefits. Look into research on drug users, career criminals and suicide bombers. Shooting heroin, robbing a gas station or killing foreign soldiers all satisfy shorter term goals at the expense of long term utility.

These people use rationality to make their decisions others would not view as a rational decision. Just because it does not satisfy your view on rationality, does not make it a-rational or irrational.

The same is true of those across the entire spectrum of the housing bubble.


RPB, Prudence is not part and parcel of Rational thought and action? No wonder we're in trouble.


Jack put his finger on the issue...leverage in the banking system (broadly defined to include former investment banks and non-bank, unsupervised financial vehicles) was 30x1 in January 2007 and 13x1 in December 2008. Most of that deleveraging occurred after Bear-Stearns weekend. "Toxic securities" is the catch-all which really means both the asset and the multiple loans attached to that collateral, most of which are non-recourse to the borrower. The asset is largely unimpaired, but the deleveraging has put the break-even for the whole package "far up the beach." The plan seems to be to give the taxpayer the whole package. What is more, the productive machinery of the US economy was geared to 20x leveraged economy. Now, banks are lending at 8 or 10x1 and the non-bank banks have folded. Can the political economy hold itself together at a 6x1 gearing? What institution, with what oversight, can create a higher multiplier? Post 9/11 monetary policy flowing through the well-engineered and lightly supervised channel of home-building finance produced a massive investment in the latest, biggest houses. That housing-stock upgrade should not be repeated, though Mr Greenspan today seemed to suggest we cannot get recovery without another round of house-building. It would be better if the next round of U.S. investment yielded more productive assets than outer-ring-suburban mcmansions.


Camp.. Thanks. And listening on Cspn to economists of IMF levels this week, much of the discussion centered on whatever amount has been re-injected into banking, not being enough. The term "bottomless" was heard as well.

Back at "street level" in the housing biz the banks are choking the builders. The "story" is that of "bank regulators" which I assume to mean even local FDIC backed community banks are contracting, and of course they can no longer "underwrite" "something that came from a cow" as one Wall Streeter turned whistle blower, on the top three rating agencies said.

The result is a chilling effect that is breaking builders who should be able to make it otherwise.

There are likely different squeeze plays in each region but here it looks like this: Builder A has "too many lots" that "aren't moving" or at least the absorbtion rate is slower.

One reason is that deals involving contingencies (ie contingent on the buyer selling his existing home) are mostly a no-no. The bank has a point.... as sometimes contingent deals result in the builder having another "spec" home if the prospective buy defaults.

Another effect is that the "move up" market is slower despite an actual increase in home prices in this region. Thus "move up lots" are a drag that prevents a builder from acquiring lower priced lots for the first time buyer market which is inherently a stronger market and SHOULD benefit from the $8,000 FTB credit. Though that too is a bit screwed up for builders; as a practical matter it will end in two months as it's set up for "closing date" rather than contract date, so the time to build and finance the home consumes the other 5-6 months until November 30th.

The operative date should be contract date as that would create an urgency to contract in the traditionally slow fall and winter months, instead of a chaotic rush to "close" before December. Also, the change would create parity between sellers of new homes and older homes.

But does it make sense to spur homebuilding prior to sopping up the surplus inventory? Absolutely! As the excess "Mcmansions" of certain areas do not fit the needs and price ranges of much of the market and we are "starting" less than one third the number of homes of the 1.7 million required for population growth and replacement of worn out homes.

Other reasons to spur housing is that no other area of the economy gives the "bang for the buck" since the exchange of 5-20% down triggers the entire expenditure and the associated jobs and sales of new (typically US made) appliances and furnishings. The auto biz is the next best bang since those purchases too are leveraged over 3-5 years, and it is these industries that led us out of every post WWII recessions.

Gspan is right as he often, but not always! is. And you are right too..... If the Mcmansions of recent years can be compared to the huge Cadillacs of the 70's, I'd hope that the new homes would be more "BMW-ish", smaller but with nice amenities, and FAR, FAR, FAR more attention paid to energy conservation measures.

Lastly? to avoid a start-stop problem. If many small and medium builders are unnecessarily knocked out of the home building industry when the predictable shortages of the right product happens, it will be filled only by the few left standing who'll be able to exact oligopolistic pricing. The barriers to entry at a competitive level are fairly high and it may take years before a competitive environment is recreated, if ever.

Many here probably saw the merger of Pulte and Centex --- one having A Pile of cash $4 billion? the other lots of land in the growing "sunbelt" areas. They'll be buying up the assets of weak builders and stockpiling land during the down turn and be well poised to freeze out pesky competition when the rebound takes place.

It all is A Mess!

dane elder

I can't help but notice a few things: first, we are a nation at war. Just as we hijacked a German radio station and spread propaganda during world war two, for the purposes of influencing what the Germans (including military, government, public servants and their families)would do, could it be possible that the transnational corporations, such as banks, are also influencing what we do during this time? Iraq and Afghanistan are not considered world powers, but the reality of oil shocks, coupled with rival superpowers who can set up an army of short-sellers CAN throw off the reserve requirements, cause banks to call in loans, or to unwind leveraged positions in other institution not because they are trying to overthrow the hegemonic power of the United States, but to exploit a distraction. Incidentally, there is one other ingredient to this downturn: it was preceded by rampant fraud, some of it consistent with identity theft. I am a victim of identity theft, and connected with the military. As a result and in spite of government's effort to shield me from the worst, I can't help but notice that--on paper--I owe more than I do, and there is nothing I can do to recover. The rebound will take place only when we recognize our boundaries, personally, professionally, financially, and internationally. If we keep overstepping those bounds and continue to lie to consumers about our balance sheets, leverage, and data practices, if we continue to lie to businesses, and even to courts, we can expect a chilling effect, because we are squandering two precious resources, the social capital of trust, and our time.

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RPB, Prudence is not part and parcel of Rational thought and action? No wonder we're in trouble.

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